Relationship between the money and bank deposits

Last Updated: 26 Mar 2021
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Part of the failure to hit the money supply growth targets were the problems associated with the M3 measurement as through financial innovations the relationship between the money and bank deposits had been distorted. From this, less rigorous attempts were made in controlling the supply using various other measurements such as M0, M1 and PSL2. The fluctuations of the exchange rate reflect both the volatility of oil prices and interest rates of the 1980's. The effects of low interest rates and rising output combined with the strong performance of the dollar over sterling had a relatively de-stabilising affect on the economy.

The cost of importing rocketed resulting in further inflationary pressures and leaving the system open to speculators. The decision was made to unofficially peg sterling to the DeutschMark as the UK was unwilling to join the ERM. The reason for following the DM were based around the reputation of independent banks, e. g. the Bundesbank, for delivering low, stable inflation and thus exchange rate valuations, and also the closeness of the West German economy with the UK's.

The last period of the Thatcher administration was characterised by boom and bust and so were reflective of the economic uncertainty associated with the era. The substantial acceleration of the economy during the late 1980's can be traced back to the policies outlined in earlier budgets by Howe and the then Chancellor Nigel Lawson. In creating an environment of low interest rates and the favourability of a depreciating pound, British industries productivity rose dramatically and the financial support (through more borrowing from low interest rates) meant internationally they were more competitive.

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This also occurred domestically as the low tax levies on income from previous budgets meant people had more disposable income, allied to the redundant credit restrictions, represented a huge rise in consumption. Not only did the period see greater financial market competition but changes in housing finance. Arguably, this could have been the driving factor in the late 1980's boom as house prices became sky high through lower stamp duties, especially in the South East, as households expectations of future wealth grew.

The changes to housing finance meant the extraction of equity from houses was simpler and more accessible, releasing more wealth into the economy adding to aggregate demand. It is no coincidence that the savings ratio was also at its lowest for a decade, with a figure of 5. 3, during the peak of the boom in early 1988. 7 By the end of 1988 the economy had down-turned significantly as it had over expanded due to the monetary policies of the March 1988 budget.

Despite predictions and warnings and due to concerns over the exchange rate deficiencies, Lawson continued to keep interest rates too low for too long a period. Thus an economic instrument to alleviate spending and over-expansion above sustainable levels was eliminated from use. The consequences of this non-action was the demand pull effect on inflation and the subsequent re-balancing of interest rates to those experienced in the 1979 to 1983 period with the final result the return to deep recession in the early 1990's.

The continued shadowing of the DM meant entry into the ERM was finally achieved after the demise of Thatcher. Yet it was unsuccessful resulting in Black Wednesday in 1992 when the UK left the mechanism after substantial devaluation of the pound at the hands of speculators including George Soros, who profited enormously. From the evidence outlined it is clear that the Thatcher administration's economic era was a mixture of limited success and disastrous failures. A major criticism can be placed on the lack of consistency and at times coherence of the policies.

Initially the emphasis was on reducing inflation through money supply regulations and then, when deemed unsuccessful, a shift towards exchange rate protectionism occurred. However, I would defend this because while adapting to the changing economic circumstances during this period, the economy had to withstand large fluctuations in oil prices and being an oil-producing nation, the UK is particularly sensitive. Also, the Single European Act reinforced the challenges of closer European integration through the relaxation of barriers and its effect on international trade in 1897.

Having since witnessed the benefits of allowing the Bank of England independence under New Labour, further criticism of Thatcher's administration would not be misplaced. Since entering independent status, the Bank of England has delivered stable levels of low inflation at around 2 to 3 percent, albeit in a favourable climate. This has effectively eliminated key decision making economic tools so as not to be exploited as short-term vote winners as the Conservatives may have used them in the past. It is beyond doubt that the nature of policies created the extreme conditions of the 1980's and into the 1990's.

The anti-inflationary policies of the early period deepened the recession and the expansionary monetary policies of the mid to late 1980's accentuated the boom beyond sustainable rates. In this respect the Thatcher administration's monetary policies were unsuccessful in achieving the stable economy required for sustained growth.

It can be concluded then that the exaggerated emphasis on the monetarist policies had a detrimental impact on the UK economy and indeed was one of the fundamental failings of the Thatcher administration. Perhaps with a greater use of fiscal and supply side policies may have resulted in a more successful stay in power, as demonstrated by Tony Blair and today's New Labour.


Crystal, Alec K. , and Price, S. (1994), Controversies in Macroeconomics, 3rd Edition, Harvester Wheatsheaf. Griffiths, A. , and Wall, S. (1999), Applied Economics, 8th Edition, Longman. Heeney, N. (1990), Mrs Thatcher's 'Fight Against Inflation', Ten Years Without Cheer. Lipsey and Crystal (1999), Principles of Economics, 9th Edition, Oxford University

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Relationship between the money and bank deposits. (2018, Sep 16). Retrieved from

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